NEW YORK (AP), Jan 04 _ Wall Street fell sharply Friday after the government's much-anticipated employment report showed weaker-than-expected job growth and a rise in the unemployment rate. The Nasdaq composite index, also pummeled by a downgrade of Intel Corp., skidded more than 3.5 percent, while the Dow Jones industrials fell more than 1.5 percent.

The Labor Department's report that employers raised payrolls by only 18,000 and that the nation's unemployment rate rose to its highest level since November 2005 unnerved investors, who worried that a weakening job market will hurt consumer spending and tip the economy toward recession.

A better-than-expected reading on the nation's service economy briefly pulled stocks off their lows but wasn't enough to shake investors' concerns.

Investors had been awaiting the jobs report for weeks as they tried to determine whether the economy would continue to benefit from robust consumer spending even as sectors like home construction, mortgage writing and manufacturing slow. Wall Street is concerned that areas of weakness could puncture growth if consumers can't depend on a solid job market.

Manufacturers, construction companies and financial services companies all cut jobs during the month amid an anemic housing market. Retailers also made reductions.

The December report showed employers added the fewest jobs to their payrolls since August 2003. Economists had predicted much stronger growth and an unemployment rate of 4.8 percent. Instead, unemployment climbed to 5 percent in December from 4.7 percent in November. While 5 percent unemployment is still considered good by historical standards, the increase from November clearly made some investors nervous.

``It's a scary number, no question about it. No matter how good you wanted to feel about the economy averting a recession, there is far less conviction than even two or three days ago,'' said Joe Balestrino, senior portfolio manager at Federated Investors.

The technology-focused Nasdaq fell for the sixth straight session and showed its steepest percentage decline since a market pullback on Feb. 27 last year. The Nasdaq declined 98.03, or 3.77 percent, to 2,504.65, in part after the downgrade of Intel, but also because its smaller-capitalization components are seen as more vulnerable in an economic slowdown.

For 2008, the Nasdaq is down 5.57; in all of 2007, the index rose 9.81 percent.

The Dow fell 256.54, or 1.96 percent, to 12,800.18, while the Standard & Poor's 500 index declined 35.53, or 2.46 percent, to 1,411.63.

It was the steepest point drop for the Dow and the S&P 500 since Dec. 11. In 2008, the Dow is off 3.5 percent and the S&P is down 3.86 percent.

The Russell 2000 index of smaller companies fell 23.41, or 3.14 percent, to 721.60 and hit a fresh 52-week low.

Declining issues outnumbered advancers by more than 3 to 1 on the New York Stock Exchange, where consolidated volume came to 4.05 billion shares, compared with 3.30 billion traded Thursday.

Bond prices rose as investors sought the safety of government-backed debt after the employment reading. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.87 percent from 3.89 percent late Thursday.

A Federal Reserve announcement Friday that it is ramping up the amount of cash available to banks through a new auction process did little to calm the markets. After two auctions of $20 billion each, the Fed has now scheduled auctions Jan. 14 and Jan. 28 at $30 billion each.

The dollar was mixed against other major currencies. Gold prices, which have risen to nearly 30-year highs in recent days, declined.

Light, sweet crude fell $1.27 to settle at $97.91 a barrel on the New York Mercantile Exchange. Oil touched $100 per barrel this week for the first time, stirring concerns about inflation.

The employment figures overshadowed a report from the Institute for Supply Management, a business group, which said its December index of non-manufacturing activity showed the nation's service sector grew in December. However, the pace was slightly slower than in November and the index fell to 53.9 in December from 54.1 the prior month. Analysts had expected a deeper decline.

It's been a difficult start to 2008 on Wall Street. After selling off in the final session of last year on Monday, investors spent the first three sessions of the new year absorbing a weaker-than-expected reading on the manufacturing sector, oil that reached $100 a barrel and Friday's dismal employment numbers.

``It's hard to point to any piece of data in recent weeks that makes you feel comfortable,'' said Balestrino, noting that many bullish investors had hoped a strong jobs picture would lift Wall Street's mood.

``This the one piece that was holding up pretty well and now it's showing some weakness as well,'' he said. ``In our business it's not the absolute number, it's the direction of the number and especially the direction versus the expectations.''

In corporate news, a JPMorgan analyst lowered his rating on Intel to ``neutral'' from ``overweight,'' citing a drop in chip orders from computer manufacturers during the fourth quarter and high inventories. Intel, one of the 30 stocks that comprise the Dow industrials, fell $2, or 8.1 percent, to $22.67.

Overseas, Japan's Nikkei stock average fell sharply, finishing down 4.03 percent to its lowest level since July 2006 after being closed since the previous Friday for holidays. The pullback followed uncertainty on Wall Street about the U.S. economy and rising oil prices.

The Dow Jones industrial average ended the week down 565.69, or 4.23 percent, at 12,800.18. The Standard & Poor's 500 index finished down 66.86, or 4.52 percent, at 1,411.63. The Nasdaq composite index ended down 169.81, or 6.35 percent, at 2,504.65.

The Russell 2000 index finished the week down 50.16, or 6.50 percent, at 721.60.

The Dow Jones Wilshire 5000 Composite Index _ a free-float weighted index that measures 5,000 U.S. based companies _ ended Friday at 14,210.84, down 700.79 points, or 4.70 percent, for the week. A year ago, the index was at 14,269.90.